U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
     For the quarterly period ended September 30, 2001


[]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934
     For the transition period from ______ to ______


                        Commission File Number: 333-22895

                     ---------------------------------------

                                  BLUEFLY, INC.
                (Name of registrant as specified in its charter)

              Delaware                                  13-3612110
   (State or other jurisdiction of          (I.R.S. Employer Identification No.)
   incorporation or organization)

                 42 West 39th Street, New York, NY                10018
              (Address of principal executive offices)          (Zip Code)

                    Issuer's telephone number: (212) 944-8000

                     ---------------------------------------

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

As of October 24, 2001, the issuer had outstanding 9,205,331 shares of Common
Stock, $.01 par value.

<PAGE>

                                  BLUEFLY, INC.
                                TABLE OF CONTENTS

                                                                            PAGE
Part I.  Financial Information

Item 1.  Financial Statements

         Consolidated Balance Sheets as of September 30, 2001 (unaudited)
             and December 31, 2000                                            3

         Consolidated Statements of Operations for the nine months ended
             September 30, 2001 and 2000 (unaudited)                          4

         Consolidated Statements of Operations for the three months ended
             September 30, 2001 and 2000 (unaudited)                          5

         Consolidated Statements of Changes in Shareholders' Equity
             (Deficit) and Redeemable Preferred Stock for the year
             ended December 31, 2000 and for the nine months ended
             September 30, 2001 (unaudited)                                   6

         Consolidated Statements of Cash Flows for the nine months ended
             September 30, 2001 and 2000 (unaudited)                          7

         Notes to Consolidated Financial Statements                           8


Item 2.  Management's Discussion and Analysis of Financial Condition
             and Results of Operation                                        10

Item 3.  Quantitative and Qualitative Disclosures About Market Risk          15

Part II. Other Information                                                   16

Item 1.  Legal Proceedings                                                   16

Item 2.  Changes in Securities and Use Of Proceeds                           16

Item 3.  Defaults Upon Senior Securities                                     16

Item 4.  Submission of Matters to a Vote of Security Holders                 16

Item 5.  Other Information                                                   16

Item 6.  Exhibits and Reports on Form 8-K                                    16

Signatures                                                                   17

                                       2
<PAGE>

Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements

                                  BLUEFLY, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          September 30,     December 31,
                                                                                               2001             2000
                                                                                               ----             ----
                                                                                           (Unaudited)
<S>                                                                                         <C>             <C>
                                                     ASSETS
Current assets
    Cash                                                                                 $  4,113,000    $  5,350,000
    Inventories, net                                                                        7,661,000       7,294,000
    Accounts receivable                                                                       985,000         861,000
    Prepaid expenses                                                                          304,000         303,000
    Other current assets                                                                      275,000         540,000
                                                                                         ------------    ------------
          Total current assets                                                             13,338,000      14,348,000

Property and equipment, net                                                                 1,095,000       1,326,000

Other assets                                                                                  153,000         194,000
                                                                                         ------------    ------------

            Total assets                                                                 $ 14,586,000    $ 15,868,000
                                                                                         ============    ============

                                   LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities
    Accounts payable                                                                     $  2,895,000    $  3,593,000
    Accrued expenses and other current liabilities                                          1,910,000       2,538,000
    Note payable (net of $302,000 of unamortized discount)                                         --      19,698,000
                                                                                         ------------    ------------
            Total current liabilities                                                       4,805,000      25,829,000

Commitments and contingencies

 Redeemable preferred stock - $.01 par value; 2,000,000 shares authorized and 0
    and 500,000 shares issued and outstanding as of September 30, 2001 and
    December 31, 2000, respectively (liquidation preference: $20 per share
    plus accrued dividends)                                                                        --      11,088,000

Shareholders' equity (deficit)
    Series A Preferred stock - $.01 par value; 500,000 shares authorized and
       500,000 and 0 shares issued and outstanding as of September 30, 2001 and
       December 31, 2000, respectively (liquidation preference: face value plus
       accrued dividends)                                                                       5,000              --

    Series B Preferred stock - $.01 par value; 9,000,000 shares authorized and
       8,910,782 and 0 shares issued and outstanding as of September 30, 2001 and
       December 31, 2000, respectively (liquidation preference: face value plus
       accrued dividends, plus $10,000,000)                                                    89,000              --

    Common stock - $.01 par value; 40,000,000 shares authorized and 9,205,331 and
       4,924,906 shares issued and outstanding as of September 30, 2001 and December
       31, 2000, respectively                                                                  92,000          49,000

    Additional paid-in capital                                                             72,184,000      17,242,000
    Accumulated deficit                                                                   (62,589,000)    (38,340,000)
                                                                                         ------------    ------------
            Total shareholders' equity (deficit)                                            9,781,000     (21,049,000)
                                                                                         ------------    ============
            Total liabilities and shareholders' equity (deficit)                         $ 14,586,000    $ 15,868,000
                                                                                         ============    ============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       3
<PAGE>

                                  BLUEFLY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    Nine Months Ended
                                                                      September 30,
                                                              -----------------------------
                                                                   2001            2000
                                                                   ----            ----
<S>                                                           <C>             <C>
Net sales                                                     $ 15,044,000    $ 11,751,000
Cost of sales                                                   10,578,000       9,680,000
                                                              ------------    ------------
     Gross profit                                                4,466,000       2,071,000


Selling, marketing and fulfillment expenses                     10,807,000      13,913,000
General and administrative expenses                              4,178,000       3,736,000
                                                              ------------    ------------
      Total                                                     14,985,000      17,649,000

Operating loss                                                 (10,519,000)    (15,578,000)

Interest income                                                    210,000         129,000

Interest expense (includes a $13,007,000 one-time, non-cash
    charge in connection with the conversion of debt and
    redeemable preferred equity to permanent equity)           (13,318,000)       (300,000)
                                                              ------------    ------------

Net loss                                                      $(23,627,000)   $(15,749,000)

Preferred stock dividends                                       (2,304,000)       (601,000)
                                                              ------------    ------------

Net loss available to common shareholders                     $(25,931,000)   $(16,350,000)
                                                              ============    ============

Basic and diluted loss per common share                             $(3.31)         $(3.32)
                                                                    ======          ======

Weighted average common shares outstanding                       7,841,240       4,924,906
                                                              ============    ============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       4
<PAGE>

                                  BLUEFLY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                   Three Months Ended
                                                     September 30,
                                              ---------------------------
                                                   2001          2000
                                                   ----          ----

Net sales                                     $ 5,113,000    $ 3,455,000
Cost of sales                                   3,654,000      2,895,000
                                              -----------    -----------
     Gross profit                               1,459,000        560,000

Selling, marketing and fulfillment expenses     2,731,000      3,884,000
General and administrative expenses             1,140,000      1,278,000
                                              -----------    -----------
      Total                                     3,871,000      5,162,000

Operating loss                                 (2,412,000)    (4,602,000)

Interest income                                    62,000         29,000

Interest expense                                  (78,000)      (208,000)
                                              -----------    -----------

Net loss                                      $(2,428,000)   $(4,781,000)

Preferred stock dividends                        (622,000)      (202,000)
                                              -----------    -----------

Net loss available to common shareholders     $(3,050,000)   $(4,983,000)
                                              ===========    ===========

Basic and diluted loss per common share            $(0.33)        $(1.01)
                                                   ======         ======

Weighted average common shares outstanding      9,205,331      4,924,906
                                              ===========    ===========

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       5
<PAGE>

                                  BLUEFLY, INC.
    CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) AND
 REDEEMABLE PREFERRED STOCK YEAR ENDED DECEMBER 31, 2000 AND FOR THE NINE MONTHS
                       ENDED SEPTEMBER 30, 2001(Unaudited)

<TABLE>
<CAPTION>
                                                                    Series A             Series B
                                                                 Preferred Stock      Preferred Stock            Common Stock
                                   Redeemable Preferred Stock     $.01 par value      $.01 par value            $.01 par value
                                   --------------------------     --------------      --------------            --------------


                                    Number of                    Number             Number                   Number
                                     shares         Amount     of shares   Amount  of shares    Amount     of shares       Amount
                                     ------         ------     ---------   ------  ---------    ------     ---------       ------
<S>                                   <C>       <C>            <C>       <C>      <C>        <C>          <C>          <C>
Balance at December 31, 1999          500,000   $ 10,286,000         --  $   --          --  $       --   4,924,906    $    49,000
Issuance of warrants in
   connection with Convertible
   Notes                                   --             --         --      --          --          --          --             --
Issuance of warrants to supplier           --             --         --      --          --          --          --             --
Accrued dividends on Series A
   Preferred Stock                         --        802,000         --      --          --          --          --             --

Net loss                                   --             --         --      --          --          --          --             --
                                    ---------   ------------    -------  ------   ---------  ----------   ---------    -----------

Balance at December 31, 2000          500,000     11,088,000         --      --          --          --   4,924,906         49,000

Conversion of Redeemable
   Preferred Stock to Preferred
   Stock Series A                    (500,000)   (11,088,000)   500,000   5,000          --          --         --              --

Conversion of debt to Preferred
   Stock Series B                          --             --         --      --   8,910,782      89,000         --              --

Sale of common stock in
   connection with Rights
   Offering ($2.34 per share)
   net of $350,000 of expenses             --             --         --      --          --          --   4,280,425         43,000

Issuance of warrants to lender             --             --         --      --          --          --          --             --

Issuance of warrants in
   exchange for services                   --             --         --      --          --          --          --             --

Issuance of warrants to investor           --             --         --      --          --          --          --             --

Net loss                                   --             --         --      --          --          --          --             --
                                    ---------   ------------    -------  ------   ---------  ----------   ---------    -----------

Balance at September 30, 2001              --   $         --    500,000  $5,000   8,910,782  $   89,000   9,205,331    $    92,000
                                    =========   ============    =======  ======   =========  ==========   =========    ===========

<CAPTION>


                                        Additional          Accumulated
                                     Paid-in capital          Deficit              Total
                                     ---------------          -------              -----
<S>                                   <C>                   <C>                <C>
Balance at December 31, 1999          $17,482,000           $(17,231,000)      $    300,000

Issuance of warrants in
   connection with Convertible
   Notes                                  467,000                     --            467,000

Issuance of warrants to supplier           95,000                     --             95,000

Accrued dividends on Series A
   Preferred Stock                       (802,000)                    --           (802,000)

Net loss                                       --            (21,109,000)       (21,109,000)
                                      -----------           ------------       ------------

Balance at December 31, 2000           17,242,000            (38,340,000)       (21,049,000)
Conversion of Redeemable
   Preferred Stock to Preferred
   Stock Series A                      18,852,000               (622,000)        18,235,000

Conversion of debt to Preferred
   Stock Series B                      26,318,000                     --         26,407,000

Sale of common stock in
   connection with Rights
   Offering ($2.34 per share)
   net of $350,000 of expenses          9,622,000                     --          9,665,000

Issuance of warrants to lender             45,000                     --             45,000

Issuance of warrants in
   exchange for services                   31,000                     --             31,000

Issuance of warrants to investor           74,000                     --             74,000

Net loss                                       --            (23,627,000)       (23,627,000)
                                      -----------           ------------       ------------

Balance at September 30, 2001         $72,184,000           $(62,589,000)       $ 9,781,000
                                      ===========           ============        ===========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       6
<PAGE>

                                  BLUEFLY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Nine Months Ended
                                                                                         September 30,
                                                                                -----------------------------
                                                                                    2001             2000
                                                                                    ----             ----
<S>                                                                             <C>             <C>
Cash flows from operating activities

  Net loss                                                                      $(23,627,000)   $(15,749,000)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                   550,000         560,000
     Warrants issued for service                                                      31,000              --
     Interest expense on conversion of debt to equity                             13,007,000              --
     Changes in operating assets and liabilities:
     (Increase) decrease in
          Inventories                                                               (367,000)       (914,000)
          Accounts receivable                                                       (124,000)       (505,000)
          Other current assets                                                       282,000         352,000
          Prepaid expenses                                                            (1,000)       (551,000)
          Other assets                                                                22,000         (25,000)
     Increase (decrease) in
          Accounts payable                                                           152,000      (1,325,000)
          Accrued expenses and other current liabilities                            (628,000)       (150,000)
                                                                                ------------    ------------
    Net cash used in operating activities                                        (10,703,000)    (18,307,000)
                                                                                ------------    ------------

Cash flows from investing activities
  Purchase of property and equipment                                                (199,000)       (721,000)
                                                                                ------------    ------------

Net cash used in investing activities                                               (199,000)       (721,000)
                                                                                ------------    ------------

Cash flows from financing activities
    Net proceeds from Rights Offering                                              9,665,000              --
    Proceeds from notes payable                                                           --      12,000,000
                                                                                ------------    ------------

Net cash provided by financing activities                                          9,665,000      12,000,000
                                                                                ------------    ------------

Net decrease in cash and cash equivalents                                         (1,237,000)     (7,028,000)
Cash and cash equivalents - beginning of period                                    5,350,000       7,934,000
                                                                                ------------    ------------
Cash and cash equivalents - end of period                                       $  4,113,000    $    906,000
                                                                                ============    ============

Supplemental disclosure of non cash information:
   Warrant issued to lender                                                     $     45,000    $         --
                                                                                ============    ============
   Warrant issued to investor                                                   $     74,000    $         --
                                                                                ============    ============
   Conversion of debt to equity                                                 $ 20,851,000    $         --
                                                                                ============    ============

Supplemental cash flow disclosure information:
   Interest                                                                     $      9,000    $         --
                                                                                ============    ============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       7
<PAGE>

                                  BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2001

NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Bluefly, Inc. and its wholly owned subsidiary (collectively the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements have been prepared without
audit in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations of any interim period are not
necessarily indicative of the results of operations to be expected for the
fiscal year. For further information, refer to the consolidated financial
statements and accompanying footnotes included in the Company's Form 10-K for
the year ended December 31, 2000.

There have been no changes in significant accounting policies since December 31,
2000. The Company has sustained net losses and negative cash flows from
operations since the establishment of Bluefly.com. The Company's ability to meet
its obligations in the ordinary course of business is dependent on its ability
to establish profitable operations or raise additional financing through public
or private equity financing, collaborative or other arrangements with corporate
sources, or other sources to fund operations. There can be no assurance that the
Company will establish profitable operations, such financing will be
consummated, or that any additional financing or other sources of capital will
be available to the Company upon acceptable terms, or at all. The inability to
obtain additional financing, when needed, would have a material adverse effect
on the Company's business, financial condition and results of operations.

NOTE 2 - THE COMPANY

The Company is a leading Internet retailer of designer fashions and home
accessories at outlet store prices. The Company's Web store ("Bluefly.com" or
"Web Site") which launched in September 1998, sells over 300 brands of designer
apparel, accessories and home products at discounts of up to 75% off of retail
prices.

In June 2001, the Company announced a streamlined operating plan designed to
achieve profitability, improve efficiency and reduce its need for additional
capital. As part of the plan, the Company eliminated approximately 32 jobs, or,
approximately 34% of its workforce, as well as reduced marketing and other
operating expenses.

NOTE 3 - RIGHTS OFFERING

On November 13, 2000, the Company entered into an investment agreement with
affiliates of Soros Private Equity Partners (collectively referred to herein as
"Soros") pursuant to which Soros agreed to invest up to an additional $15
million in the Company, subject to certain conditions. Under the terms of the
agreement, Soros initially invested, in November 2000, an additional $5 million
in the form of a promissory note (the "New Note"), convertible into preferred
stock at a price of $2.34 per share. In February 2001, pursuant to the
agreement, the Company offered the public shareholders of the Company the right
to purchase up to an aggregate of $20 million of common stock (the "Rights
Offering"). Pursuant to its agreement with the Company, as part of the Rights
Offering, Soros purchased the difference between $20 million and the amount
purchased by the public shareholders (approximately $16,000), up to a total of
$10 million, all at a price of $2.34 per share (the "Standby Commitment"). As
part of the transaction, on February 5, 2001, $15 million of convertible
promissory notes (the "Amended Notes") as well as the New Note, and the related
accrued interest on both the Amended and New Note, converted into 8,910,782
shares of the Company's Series B Convertible Preferred Stock (the "Series B
Preferred Stock") at a price of $2.34 per share. Immediately after the closing
of the Rights Offering, Soros beneficially owned 78% of the outstanding Common
Stock of the Company.

The conversion price of the Company's Series A Convertible Preferred Stock
("Series A Preferred Stock") previously issued to Soros and other investors was
reduced to $2.34 per share.

The accompanying financial statements reflect the conversion of the Amended
Notes and the New Note into Series B Preferred Stock at a price of $2.34 per
share, after giving effect to the remaining unamortized discount of $302,000 and
the conversion of

                                       8
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

accrued interest on both the Amended Notes and New Note of $851,000 through
February 5, 2001 into shares of Series B Preferred Stock. The Company recorded a
beneficial conversion feature of approximately $5,556,000 in connection with the
conversion of the Amended Notes into Series B Preferred Stock. This amount was
credited to additional paid-in capital and charged against interest expense in
accordance with Emerging Issues Task Force Issue No. 98-5 ("EITF No. 98-5"). In
addition, as a result of certain changes made to the Certificate of Designation
for the Series A Preferred Stock in connection with the second closing of the
agreement with Soros, the Series A Preferred Stock was converted into permanent
equity and the conversion price was reduced from $10.50 to $2.34. This resulted
in the recording of approximately $7,771,000 to additional paid-in capital. The
corresponding charge to accumulated deficit was broken out as follows:
$5,000,000 was classified as debt discount on the New Note, and charged to
interest expense, $2,149,000 was classified as interest expense and $622,000 was
assigned to dividends.

NOTE 4 - FINANCING AGREEMENT

On March 30, 2001, the Company entered into a Financing Agreement (the
"Financing Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal") pursuant
to which Rosenthal is providing to the Company certain credit accommodations,
including loans or advances, factor-to-factor guarantees or letters of credit in
favor of suppliers or factors or purchases of payables owed to the Company's
suppliers (the "Loan Facility"). The maximum amount available under the Loan
Facility is an amount equal to the lesser of (i) the undrawn amount of the Soros
Guarantee (defined below) plus the lesser of (x) $2 million, (y) 20% of the book
value of the Company's inventory or (z) the full liquidation value of the
Company's inventory or (ii) $10 million. As of September 30, 2001, the Company
had approximately $4.0 million available under the Loan Facility. Of the total
amount available under the Loan Facility as of September 30, 2001, approximately
$1.9 million has been borrowed, leaving $2.1 million available against the Loan
Facility. The Company pays interest monthly on the average daily amount
outstanding under the Loan Facility during the preceding month at a per annum
rate equal to the prime rate plus 1%. For the period ended September 30, 2001
interest expense totaled approximately $9,000.

In consideration for the Loan Facility, among other things, the Company granted
to Rosenthal a first priority lien (the "Rosenthal Lien") on substantially all
of its assets, including control of all of the Company's cash accounts upon an
event of default and certain of its cash accounts in the event that the total
amount of monies loaned the Company under the Loan Facility exceeds 90% of the
undrawn amount of the Standby Letter of Credit (defined below) for more than ten
days. The Company also issued to Rosenthal a warrant to purchase 50,000 shares
of the Company's Common Stock at an exercise price of $2.34 per share
exercisable for five years. The Company valued the warrant using the
Black-Scholes option pricing model and credited additional paid in capital for
$45,000. This amount is being amortized over the life of the Loan Facility.

In connection with the Loan Facility, the Company entered into a Reimbursement
Agreement with Soros pursuant to which Soros agreed to issue a Standby Letter of
Credit at closing in the amount of $2.5 million in favor of Rosenthal to
guarantee a portion of the Company's obligations under the Financing Agreement.
In addition, during the term of the Financing Agreement, at the Company's
request, Soros will issue another Standby Letter of Credit for an additional
$1.5 million. As used herein, the term "Soros Guarantee" means the total face
amount of all Standby Letters of Credit which Soros is maintaining in connection
with the Loan Facility and the term "Standby Letter of Credit" shall mean any
standby letter of credit issued by Soros in favor of Rosenthal in connection
with the Loan Facility. In consideration for the Soros Guarantee, the Company
granted to Soros a lien (the "Soros Lien") subordinated to the Rosenthal Lien on
substantially all of the Company's assets, and issued to Soros a warrant (the
"Soros Upfront Warrant") to purchase 100,000 shares of the Company's Common
Stock at an exercise price equal to the average closing price of the Company's
Common Stock on the ten trading days preceding September 15, 2001, exercisable
for ten years beginning on September 16, 2001. The Company accounted for the
warrant in accordance with Accounting Principles Board Opinion No. 14 ("APB No.
14") and credited additional paid in capital for approximately $74,000. This
amount is being amortized over the life of the Loan Facility.

Subject to certain conditions, if the Company defaults on any of its obligations
under the Financing Agreement, Rosenthal has the right to draw upon the Standby
Letter of Credit to satisfy any such obligations. If Rosenthal draws on the
Standby Letter of Credit, pursuant to the terms of the Reimbursement Agreement,
the Company would have the obligation to, among other things, reimburse Soros
for any amounts drawn under such Standby Letter of Credit plus interest accrued
thereon. In addition, to the extent that

                                       9
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

Rosenthal draws on the Standby Letter of Credit during the continuance of a
default under the Financing Agreement or at any time that the total amount
outstanding under the Loan Facility exceeds 90% of the Standby Letter of Credit,
the Company would be required to issue to Soros another warrant (each a
"Contingent Warrant") to purchase a number of shares of Common Stock equal to
the quotient of (a) any amounts drawn under the Soros Guarantee and (b) 75% of
the average closing price of the Company's Common Stock on the ten trading days
preceding the date of issuance of such warrant. Each Contingent Warrant will be
exercisable for ten years from the date of issuance at an exercise price equal
to 75% of the average closing price of the Company's Common Stock on the ten
trading days preceding the later of (a) ten trading days after the date of
issuance and (b) September 15, 2001.

Under the Financing Agreement, Soros has the right to purchase all of the
Company's obligations to Rosenthal under the Loan Facility from Rosenthal (the
"Buyout Option") at any time during the term of the Financing Agreement. With
respect to such Buyout Option, Soros has the right to request that Rosenthal
make a draw under the Standby Letter of Credit as consideration for Soros'
purchase of such obligations. The initial term of the Financing Agreement ends
on March 30, 2002. The Financing Agreement provides for automatic one year
renewals unless either party provides at least 30 day prior notice of its
decision not to renew.

NOTE 5 - EARNINGS (LOSS) PER SHARE

The Company has determined Earnings (Loss) Per Share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic earnings (loss) per share excludes dilution and is computed by
dividing earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period.

Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period, adjusted to reflect potentially dilutive securities.
Due to the loss from continuing operations, options and warrants to purchase
4,842,703 shares of Common Stock and Preferred Stock convertible into 13,184,286
shares of Common Stock were not included in the computation of diluted earnings
per share because the result of the exercise of such would be antidilutive.

NOTE 6 - RECLASSIFICATIONS

Certain amounts in the consolidated financial statements of the prior period
have been reclassified to conform to the current period presentation for
comparative purposes.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Overview

Bluefly is a leading Internet retailer of designer fashion at discounted prices.
We sell over 300 brands of designer clothing, fashion accessories and home
products at discounts ranging from 25% to 75% off of retail prices. In February
2001, we changed our state of incorporation from New York to Delaware. We derive
revenue primarily from the sale of designer products on our Web Site. Revenue is
recognized when goods are received by our customers, which occurs only after
credit card authorization. We generally permit returns for any reason within 90
days of the sale. Accordingly, we reserve for estimated future returns and bad
debt at the time of shipment based on historical data. However, our future
return and bad debt rates could differ significantly from historical patterns.

We have incurred substantial costs to develop our Web Site and infrastructure.
In order to expand our business, we intend to invest in sales, marketing,
merchandising, operations, information systems, site development and additional
personnel to support these activities. We therefore expect to continue to incur
substantial operating losses until at least the fourth quarter of fiscal 2002.

In June 2001, we announced a streamlined operating plan designed to achieve
profitability, improve efficiency and reduce our

                                       10
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

need for additional capital. As part of the plan, we eliminated approximately 32
jobs, or, approximately 34% of our workforce, as well as reduced marketing and
other operating expenses. In connection with these cutbacks we recorded a
pre-tax charge of approximately $475,000. Of this amount, approximately $145,000
is included in selling, marketing and fulfillment costs and $330,000 is included
in general and administrative expenses. There can be no assurances that this
trend will continue.

Our net sales increased nearly 48% to $5,113,000 for the three months ended
September 30, 2001 from $3,455,000 for the three months ended September 30,
2000. Our gross profit increased by over 160% to $1,459,000 from $560,000. Gross
margin grew to 28.5% in the third quarter of 2001 from 16.2% in the third
quarter of 2000. Operating loss (before interest income and interest expense)
for the third quarter of 2001 decreased to $2,412,000, or $0.26 per share, from
$4,602,000 or $0.93 per share, in the third quarter of 2000. This represents the
fourth consecutive quarter (based on a year over year comparison) that we have
reduced our operating loss. This trend is due to a continued increase in sales,
an increase in gross margin, as well as a reduction in selling, marketing and
fulfillment expenses and general and administrative expenses.

New customers for the third quarter of 2001 totaled 21,113. This represents a
decrease of 14% compared to 24,497 new customers acquired in the third quarter
of 2000. Although the number of new customers acquired during the third quarter
decreased compared to the same period in the prior year, the effect was offset
by the increase in the percentage of quarterly sales from repeat customers as
well as the increase in average order size. The percentage of gross sales from
repeat customers increased to 64% for the quarter ended September 30, 2001 from
51% in 2000. Average order size (including shipping and handling revenue) grew
by over 33% to $144 in the third quarter of 2001 compared to $108 in the third
quarter of 2000. Customer acquisition cost for the three months ended September
30, 2001 decreased by approximately 58% to approximately $24 from approximately
$57 for the third quarter of 2000.

In accordance with Emerging Issue Task Force Issue No. 00-10, we have included
revenues from shipping and handling in net revenue. Out-bound shipping costs are
included in cost of sales. These amounts were previously offset against each
other and included in selling, marketing and fulfillment expenses in the
Statement of Operations. All prior periods have been reclassified to conform
with this presentation.

Results of Operations

For the Nine Months Ended September 30, 2001 compared to the Nine Months Ended
September 30, 2000

Net sales: Gross sales, which consists primarily of revenue from product sales
and shipping and handling revenue (before any adjustment for reserves or
promotional discounts), totaled $21,771,000 for the nine months ended September
30, 2001. We recorded a provision for returns and credit card chargebacks and
other discounts of $6,727,000, or approximately 30.9% of gross sales. The
reserve allowance takes into account our 90-day return policy and actual
experience to date, which may vary over time. After the necessary provisions for
returns, credit card chargebacks and adjustments for uncollected sales taxes,
our net sales for the nine months ended September 30, 2001 were $15,044,000.
This represents an increase of approximately 28% compared to net sales for the
nine months ended September 30, 2000, in which net sales totaled $11,751,000.
The increase in sales was primarily attributable to an increase in average order
size as well as an increase in sales to repeat customers. The increase in sales
was partially offset by an increase in the provision for returns and credit card
chargebacks of approximately 4% in 2001 compared to 2000.

Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the nine months ended September 30, 2001
totaled $10,578,000, resulting in gross margin of approximately 29.7%. Cost of
sales for the nine months ended September 30, 2000 were $9,680,000, resulting in
gross margin of 17.6%. The increase in gross margin resulted primarily from
improved product margins and decreased cost of freight out as a percentage of
revenue, attributable to a change in carrier.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses consist of costs associated with online strategic marketing
relationships, print advertising, Web Site hosting, inventory management,
fulfillment costs, and customer

                                       11
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

service. Selling, marketing and fulfillment expenses totaled $10,807,000 for the
nine months ended September 30, 2001. Of the total selling, marketing and
fulfillment expenses for the nine months ended September 30, 2001, marketing
expenses related to online and print advertising totaled approximately
$3,451,000, Web Site hosting costs totaled approximately $1,653,000, fulfillment
costs totaled approximately $1,591,000 and salaries related to those departments
totaled $1,623,000. Selling, marketing and fulfillment expenses for the nine
months ended September 30, 2000 were approximately $13,913,000. Of the total
selling, marketing and fulfillment expenses for the nine months ended September
30, 2000, marketing expenses related to online and print advertising totaled
approximately $7,437,000, Web Site hosting costs totaled approximately
$1,593,000, fulfillment costs totaled approximately $1,349,000 and salaries
related to those departments totaled $1,165,000.

The decreased marketing expenses was a result of our effort to increase the
efficiency of our marketing spending. The increase in Web Site hosting costs
resulted from our efforts to improve the speed and stability of the Web Site and
effectively handle traffic to the Web Site. The increased fulfillment costs were
largely attributable to the increase in the number of receipts as well as the
order volume. Included in the selling, marketing and fulfillment costs for the
nine months ended September 30, 2001 are approximately $145,000 of costs
associated with the Company's streamlined operating plan.

General and administrative expenses: General and administrative expenses consist
of merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the nine months ended
September 30, 2001 were $4,178,000 as compared to $3,736,000 for the nine months
ended September 30, 2000. The increase in general and administrative expenses
was largely the result of approximately $330,000 of one time costs in connection
with the Company's June 2001 streamlined operating plan.

Interest expense and Interest income: Interest expense for the nine months ended
September 30, 2001 totaled $13,318,000. This amount consists principally of
approximately $13,007,000 of non-cash, one-time charges that were incurred in
connection with the conversion of our notes payable and redeemable equity into
permanent equity. This amount also includes interest expense of $175,000,
related to the interest on the notes payable that were issued during fiscal
2000. In connection with the increase in the cash balance, interest income for
the nine months ended September 30, 2001 increased to $210,000 from $129,000 for
the nine months ended September 30, 2000.


For the Three Months Ended September 30, 2001 compared to the Three Months
Ended September 30, 2000


Net sales: Gross sales, which consists primarily of revenue from product sales
and shipping and handling revenue (before any adjustment for reserves or
promotional discounts), totaled $7,627,000 for the three months ended September
30, 2001. We recorded a provision for returns and credit card chargebacks and
other discounts of $2,514,000, or approximately 32.9% of gross sales. The
reserve allowance takes into account our 90-day return policy and actual
experience to date, which may vary over time. After the necessary provisions for
returns, credit card chargebacks and adjustments for uncollected sales taxes,
our net sales for the three months ended September 30, 2001 were $5,113,000.
This represents an increase of nearly 48% compared to net sales for the three
months ended September 30, 2000, in which net sales totaled $3,455,000. The
increase in sales was primarily attributed to an increase in average order size
as well as an increase in sales to repeat customers. The increase in sales was
partially offset by an increase in the provision for returns and credit card
chargebacks of approximately 4% in 2001 compared to 2000.

Cost of sales: Cost of sales consists of the cost of product sold to customers,
in-bound and out-bound shipping costs, inventory reserves, commissions and
packing materials. Cost of sales for the three months ended September 30, 2001
totaled $3,654,000, resulting in gross margin of approximately 28.5%. Cost of
sales for the three months ended September 30, 2000 were $2,895,000, resulting
in gross margin of 16.2%. The increase in gross margin resulted primarily from
improved product margins.

Selling, marketing and fulfillment expenses: Selling, marketing and fulfillment
expenses consist of costs associated with online strategic marketing
relationships, print advertising, Web Site hosting, inventory management,
fulfillment cost, and customer service. Selling, marketing and fulfillment
expenses totaled $2,731,000 for the three months ended September 30, 2001. Of
the total selling, marketing and fulfillment expenses for the quarter ended
September 30, 2001, marketing expenses related to online and print advertising
totaled approximately $501,000, Web Site hosting costs totaled approximately
$532,000, fulfillment costs

                                       12
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

totaled approximately $624,000 and salaries related to those departments totaled
$467,000. Selling, marketing and fulfillment expenses for the three months ended
September 30, 2000 were approximately $3,884,000. Of the total selling,
marketing and fulfillment expenses for the quarter ended September 30, 2000,
marketing expenses related to online and print advertising totaled approximately
$1,407,000, Web Site hosting costs totaled approximately $548,000, fulfillment
costs totaled approximately $634,000 and salaries related to those departments
totaled $443,000.

The decrease in marketing expenses was a result of our ability to obtain more
favorable terms from certain media companies as well as our effort to increase
the efficiency of our marketing spending. The decrease in Web Site hosting costs
resulted from our efforts to reduce the number of web servers utilized. The
decreased fulfillment costs were largely attributable to a decrease in the
number of orders.

General and administrative expenses: General and administrative expenses consist
of merchandising, finance and administrative salaries and related expenses,
insurance costs, accounting and legal fees, depreciation and other office
related expenses. General and administrative expenses for the three months ended
September 30, 2001 were $1,140,000 as compared to $1,278,000 for the three
months ended September 30, 2000. The decrease in general and administrative
expenses was largely the result of cost cutting measures such as a the reduced
headcount, decrease in consulting fees, and office administration costs
implemented in connection with the implementation of the streamlined operating
plan announced on June 19, 2001.

Interest expense and Interest income: Interest expense for the three months
ended September 30, 2001 totaled $78,000 compared to $208,000 for the same
period in 2000. Interest expense for the three months ended September 2000
related entirely to interest on notes that were converted in February 2001. In
connection with the increase in the cash balance, interest income for the three
months ended September 30, 2001 increased to $62,000 from $30,000 for the three
months ended September 30, 2000.

Liquidity and Capital Resources

At September 30, 2001, we had approximately $4.1 million of cash and cash
equivalents and working capital of approximately $8.5 million. In addition, as
of September 30, 2001, the Company had approximately $4.0 million available
under the Loan Facility. Of the total amount available under the Loan Facility
as of September 30, 2001, approximately $1.9 million has been borrowed, leaving
approximately $2.1 million available against the Loan Facility.

On November 13, 2000, we entered into an investment agreement with affiliates of
Soros pursuant to which Soros agreed to invest up to an additional $15 million
in the Company, subject to certain conditions. Under the terms of the agreement,
Soros initially invested, in November 2000, an additional $5 million in the form
of a New Note, convertible into preferred stock at a price of $2.34 per share.
In February 2001, pursuant to the agreement, we offered the public shareholders
of the Company the right to purchase up to an aggregate of $20 million of common
stock. Pursuant to its agreement with the Company, as part of the Rights
Offering, Soros purchased the difference between $20 million and the amount
purchased by the public shareholders (approximately $16,000), up to a total of
$10 million, all at a price of $2.34 per share. As part of the transaction, on
February 5, 2001, the Amended Notes as well as the New Note, and the relate
accrued interest on both the Amended and New Note, converted into shares of our
Series B Convertible Preferred Stock at a price of $2.34 per share. Immediately
after the closing of the Rights Offering, Soros beneficially owned 78% of the
outstanding Common Stock of the Company.

The accompanying financial statements reflect the conversion of the Amended
Notes and the New Notes into Series B Preferred Stock at a price of $2.34 per
share, after giving effect to the remaining unamortized discount of $302,000 and
the conversion of accrued interest on both the Amended Notes and New Notes of
$851,000 through February 5, 2001, into shares of Series B Preferred Stock. We
recorded a beneficial conversion feature of approximately $5,556,000 in
connection with the conversion of the Amended Notes into Series B Preferred
Stock. This amount was credited to additional paid-in capital and charged
against interest expense in accordance with EITF No. 98-5. In addition, as a
result of certain changes made to the Certificate of Designation for the Series
A Preferred Stock in connection with the second closing of the investment
agreement, the Series A Preferred Stock was converted into permanent equity and
the conversion price was reduced from $10.50 to $2.34. This resulted in the
recording of approximately $7,771,000 to additional paid-in capital. The
corresponding charge to accumulated deficit was broken out as

                                       13
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

follows: $5,000,000 was classified as debt discount on the New Note, and charged
to interest expense, $2,149,000 was classified as interest expense and $622,000
was assigned to dividends.

On March 30, 2001, we entered into a Financing Agreement with Rosenthal pursuant
to which Rosenthal is providing us certain credit accommodations, including
loans or advances, factor-to-factor guarantees or letters of credit in favor of
suppliers or factors or purchases of payables owed to our suppliers. The maximum
amount available under the Loan Facility is an amount equal to the lesser of (i)
the undrawn amount of the Soros Guarantee (defined below) plus the lesser of (x)
$2 million, (y) 20% of the book value of the Company's inventory or (z) the full
liquidation value of the Company's inventory or (ii) $10 million. We pay
interest monthly on the average daily amount outstanding under the Loan Facility
during the preceding month at a per annum rate equal to the prime rate plus 1%.

In consideration for the Loan Facility, among other things, we granted to
Rosenthal a first priority lien (the "Rosenthal Lien") on substantially all of
our assets, including control of all of our cash accounts upon an event of
default and certain of our cash accounts in the event that the total amount of
monies loaned us under the Loan Facility exceeds 90% of the undrawn amount of
the Standby Letter of Credit (defined below) for more than ten days. We also
issued to Rosenthal a warrant to purchase 50,000 shares of our Common Stock at
an exercise price of $2.34 per share exercisable for five years.

In connection with the Loan Facility, we entered into a Reimbursement Agreement
with Soros pursuant to which Soros agreed to issue a Standby Letter of Credit at
closing in the amount of $2.5 million in favor of Rosenthal to guarantee a
portion of our obligations under the Financing Agreement. In addition, during
the term of the Financing Agreement, at our request, Soros will issue another
Standby Letter of Credit for an additional $1.5 million. As used herein, the
term "Soros Guarantee" means the total face amount of all Standby Letters of
Credit which Soros is maintaining in connection with the Loan Facility and the
term "Standby Letter of Credit" shall mean any standby letter of credit issued
by Soros in favor of Rosenthal in connection with the Loan Facility. In
consideration for the Soros Guarantee, we granted to Soros a lien (the "Soros
Lien") subordinated to the Rosenthal Lien on substantially all of our assets,
and issued to Soros a warrant (the "Soros Upfront Warrant") to purchase 100,000
shares of our Common Stock at an exercise price equal to the average closing
price of our Common Stock on the ten days preceding September 15, 2001,
exercisable for ten years beginning on September 16, 2001.

Subject to certain conditions, if we default on any of our obligations under the
Financing Agreement, Rosenthal has the right to draw upon the Standby Letter of
Credit to satisfy any such obligations. If Rosenthal draws on the Standby Letter
of Credit, pursuant to the terms of the Reimbursement Agreement, we would have
the obligation to, among other things, reimburse Soros for any amounts drawn
under such Standby Letter of Credit plus interest accrued thereon. In addition,
to the extent that Rosenthal draws on the Standby Letter of Credit during the
continuance of a default under the Financing Agreement or at any time that the
total amount outstanding under the Loan Facility exceeds 90% of the Standby
Letter of Credit, we would be required to issue to Soros another warrant (each a
"Contingent Warrant") to purchase a number of shares of Common Stock equal to
the quotient of (a) any amounts drawn under the Soros Guarantee and (b) 75% of
the average closing price of our Common Stock on the ten trading days preceding
the date of issuance of such warrant. Each Contingent Warrant will be
exercisable for ten years from the date of issuance at an exercise price equal
to 75% of the average closing price of our Common Stock on the ten trading days
preceding the later of (a) ten trading days after the date of issuance and (b)
September 15, 2001.

Under the Financing Agreement, Soros has the right to purchase all of our
obligations to Rosenthal under the Loan Facility from Rosenthal (the "Buyout
Option") at any time during the term of the Financing Agreement. With respect to
such Buyout Option, Soros has the right to request that Rosenthal make a draw
under the Standby Letter of Credit as consideration for Soros' purchase of such
obligations.

As of September 30, 2001, we had marketing and advertising commitments of
approximately $300,000 through December 31, 2001.

In order to continue to expand our product offerings, we intend to expand our
relationships with suppliers of end-of-season and excess name brand apparel and
fashion accessories. We expect that our suppliers will continue to include
designers and retail stores

                                       14
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

that sell excess inventory as well as third-party end-of-season apparel
aggregators. To achieve our goal of offering a wide selection of top name brand
designer clothing and fashion accessories, we may acquire certain goods on
consignment and may explore leasing or partnering select departments with
strategic partners and distributors. Due to our recurring losses, a number of
our suppliers have limited our payment terms and, in some cases, have required
us to pay for merchandise in advance of delivery. We believe that the Loan
Facility has allowed us to negotiate more favorable payment terms with
suppliers. We expect to continue to use the Loan Facility to negotiate more
favorable payment terms with suppliers in the future, although there can be no
assurance that this will be the case.

We anticipate that the proceeds from the New Note, the Rights Offering and the
Financing Agreement together with existing resources and cash generated from
operations, should be sufficient to satisfy our cash requirements into the
second quarter of 2002. However, we may seek additional debt and/or equity
financing sooner in order to maximize the growth of our business. There can be
no assurance that any additional financing or other sources of capital will be
available to us upon acceptable terms, or at all. The inability to obtain
additional financing, when needed, would have a material adverse effect on our
business, financial condition and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have assessed our vulnerability to certain market risks, including interest
rate risk associated with financial instruments included in cash and cash
equivalents and our Loan Facility. Due to the short-term nature of these
investments we have determined that the risks associated with interest rate
fluctuations related to these financial instruments do not pose a material risk
to us.

Special Note Regarding Forward Looking Statements

This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by the company
with the Securities and Exchange Commission, including Forms 8-A, 8-K, 10-Q, and
10-K. These risks and uncertainties include, but are not limited to, the
following: the Company's limited working capital, need for additional capital
and potential inability to raise such capital; the competitive nature of the
business and the potential for competitors with greater resources to enter such
business; adverse trends in the retail apparel market; the risk that recent
favorable trends in sales, gross margin, gross profit and reduced sales
marketing and fulfillment expenses and reductions in operating losses will not
continue; risks of litigation for sale of unauthentic or damaged goods and
litigation risks related to sales in foreign countries; availability formulas
under the Rosenthal credit facility which limit the amount of funds available
for borrowing; the Company's potential inability to make repayments under the
Rosenthal credit facility and the possible shareholder dilution that could
result if the Soros standby letter of credit is drawn upon; the risk of default
by the Company under the Rosenthal financing agreement and the consequences that
might arise from the Company having granted a lien on substantially all of its
assets under that agreement; consumer acceptance of the Internet as a medium for
purchasing apparel; recent losses and anticipated future losses; risks that the
Company will be unable to reduce the levels of losses; potential adverse effects
on gross margin resulting from mark downs and allowances; the capital intensive
nature of such business (taking into account the need for advertising to promote
such business); the dependence on third parties and certain relationships for
certain services, including the Company's dependence on United States Postal
Service and U.P.S. (and the risks of a mail slowdown due to terrorist activity)
and the Company's dependence on its third-party web hosting and fulfillment
centers; the risk of increased mailing costs; the successful hiring and
retaining of personnel; the dependence on continued growth of online commerce;
rapid technological change; online commerce security risks; the startup nature
of the Internet business; governmental regulation and legal uncertainties;
management of potential growth; and unexpected changes in fashion trends.

                                       15
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

Part II  - OTHER INFORMATION

Item 1.  Legal Proceedings

We currently and from time to time, are involved in litigation incidental to the
conduct of our business. However we are not party to any lawsuit or proceeding
which in the opinion of management is likely to have a material adverse effect
on us.

Item 2.  Changes in Securities and Use Of Proceeds

None.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

Item 5.  Other Information

None.

Item 6.  Exhibits and Reports on Form 8-K

(a)    The following is a list of exhibits filed as part of this Report:

         None.

(b)    Reports on Form 8-K:

         None.

                                       16
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2001

                                   SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                                BLUEFLY, INC.

                                                By: /s/ E. Kenneth Seiff
                                                    --------------------
                                                E. Kenneth Seiff
                                                CEO and President


                                                By: /s/ Patrick C. Barry
                                                    --------------------
                                                Patrick C. Barry
                                                Chief Financial Officer

October 24, 2001

                                       17